3 Mistakes First Time Homeowners Make when Refinancing

First time homeowners may get a little confused when considering refinancing their mortgage. With the plethora of options out there, it is easy for anyone to have problems. If you have never done it before, there are many things that you may not understand. Here are a few of the more common mistakes that first time homeowners are making.

1. Refinancing on a Whim

One monumental mistake that you could make is deciding to finance on a whim. While it might not always be a bad thing to make a quick decision, if you are doing it for the wrong reasons, it could be. For example, many homeowners use up their equity and get cash out of a refinance for the purpose of taking a vacation. Taking a vacation with your hard-earned equity is not the best use of your funds.

Taking your equity out for any frivolous uses or purchases is never a good idea. You want to make sure that you are using your equity for the best possible reasons. You should put a lot of thought into your decision to borrow against your equity. In most cases, it has taken you several years to accumulate and it should not be used lightly.

2. Taking a Higher Interest Rate

First time homeowners that need cash will do many things to get the money that they need. Sometimes, this includes taking a higher interest rate on your new mortgage. For example, you have $30,000 of available equity and you need $30,000. In order to get the cash out, you take out a mortgage at a rate of 8% over the next 30 years. When you originally took out your first mortgage, your rate was at 6%. While 2% might not seem like much to get the money that you need, you are throwing away thousands of dollars in the process. Your monthly payment will be higher and the amount of money that you spend on interest over 30 years will be astounding.

Instead of agreeing to a higher interest rate on your mortgage, take a look at a home equity loan. If you cannot find a mortgage that meets your needs, you might be better off just doing a home equity loan. This will allow you to pay off the loan in a shorter period of time and keep your low interest rate on the mortgage.

3. Throw Money Away on Closing Costs

Many first time homeowners fail to realize the effects that closing costs can have on your mortgage. When you refinance, you will usually have to pay a few thousand dollars in closing costs. If you have not thought this through properly, you might end up throwing away more money than it is worth to refinance. If you are trying to save money be refinancing into a lower interest rate, you might throw away your savings on closing costs. Weigh the opportunities against the costs before you do anything.